Small businesses rely on line of credit financing to access working capital and meet seasonal cashflow requirements.
Although a revolving line of credit is the most common form of line of credit financing, there seems to be a lot of confusion about revolving line of credits in the small business community.
What is a revolving line of credit?
A revolving line of credit is a convenient and flexible form of financing for small and medium-sized businesses. Once you have established a revolving line of credit with a commercial lender, you can withdraw loan proceeds whenever you need them. As the loan is repaid, the available funds in the revolving line of credit are replenished. It might help to think about it as a credit card account without the credit card.
Who needs a revolving line of credit?
The short answer is that any business that requires capital for daily operations or experiences variable cashflow needs a revolving line of credit. In other words, almost all small and medium-sized companies can benefit from revolving line of credits to cover seasonal fluctuations, manage vendor payment cycles, purchase inventory, and provide funding for unexpected short-term events.
How does a revolving line of credit work?
The application and approval process for a business revolving line of credit is the same as any other type of commercial financing. Lenders will need to examine your company's financial position to make sure you are capable of making line of credit payments in a timely manner. The lender may also require some form of collateral and/or a personal guarantee in exchange for the line of credit. Once your line of credit has been approved, you are free to withdraw funds at any time, on your own time schedule. You don't have to withdraw funds until you need them and it's in your best interest to repay principal as quickly as possible to avoid interest charges.
What are the benefits of a revolving line of credit?
A revolving line of credit is a highly flexible financing tool. It offers entrepreneurs access to financing on their terms and schedules. Since the line of credit is replenished when the loan is repaid, the business has access to an ongoing source of financing.
What are the drawbacks of a revolving line of credit?
It's easy for businesses to fall into the trap of using a revolving line of credit to fund business losses. When this happens, the revolving line of credit can become a detrimental tool that lets the company avoid serious, underlying problems.